The petroleum refining and marketing industries
with their diverse and widely dispersed range of facilities have
provided Australia with, in the main, secure and reliable fuel
supplies. These industries account for around one per cent of gross
domestic product of the overall Australian economy.

As with many other industries, the petroleum
refining and retailing markets have been subjected to significant
restructuring. This has resulted to date in the abandonment of the
setting of a maximum endorsed wholesale price for automotive
gasoline (petrol) and automotive diesel oil (diesel) by the
Australian Competition and Consumer Commission. It has also led to
open access to bulk terminals owned by the refiners, allowing
wholesale bulk purchase of refined product by interested parties on
commercial terms.

Despite an apparent stable appearance of present
arrangements, it is almost certain that significant changes are
likely to occur in the foreseeable future to the petroleum refining
and marketing industries because of a number of emerging factors
including:

present low levels of profitability of Australia's refineries
deemed by industry commentators as unsustainable, brought about by
competition from imports, aging infrastructure and small size

the necessity for substantial capital expenditure for refinery
upgrades to accommodate production of cleaner, lower sulphur fuels
due to increasingly tight vehicular emission standards. If all
refineries were upgraded to produce the cleaner fuels, an
investment of the order of $1 billion would be required

the stalling of the deregulatory process, particularly the
Government's decision in September 1999 not to proceed with the
repeal of the Petroleum Retailing Marketing Franchise Act
1980 and Petroleum Retail Marketing Sites Act1980 (Franchise Act and Sites Act) and the establishment
of a mandatory Oilcode. The Sites Act disallows
any rearrangement of company and franchisee retailing sites

continuing fierce competition from independent petroleum
product retailers who now account for approximately 25 per cent of
the retail petrol and diesel markets. The independent retailers are
not governed by the Franchise Act and Sites Act

the apparent regulatory hurdles to further rationalisation and
merging of current refining and marketing operations and
arrangements between the four majors, Caltex, BP, Mobil and
Shell.

Australia's refineries presently supply around
95 per cent of petroleum product required by the Australian retail
market. The remaining five per cent is imported and purchased
largely by the growing number of independent retailers. The
independents have introduced a new level of competition into the
petrol and diesel retailing markets and use the ready availability
of imported product as a bargaining tool to secure bulk supplies
from the Australian refiners. An oversupply of petroleum product
has developed in the Asia Pacific region as a result of the
downturn in the Asian economies coupled with either capacity
expansions or new refineries being brought on stream in a number of
Asian countries.

Petrol prices, despite recent rises, still
remain relatively low in comparison to other OECD countries and in
real terms have actually declined since the 1980s. Petrol price
differentials in metropolitan and country areas still remain a
major concern and the large difference in most cases cannot be
solely attributed to transportation costs. There is a lack of
transparency between the petrol pricing components in country and
regional areas and in many instances it is difficult if not
impossible to see which component (refined petroleum product,
distribution or retail) margins are being adjusted.

Federal government petroleum product excise is
by far the largest component of the petrol and diesel retail pump
price (around 60 per cent) and this component is automatically
increased every six months in line with the consumer price index.
Petroleum product excise has risen dramatically over the period
1980-1981 to 1999-2000 and is now a major component of the
Commonwealth Budget. Commonwealth petroleum taxes have switched
from the wellheads in the oilfields to the petrol pump or point of
sale.

Recent price increases for petroleum products
(petrol, diesel and liquefied petroleum gas (LPG), all popularly
attributed to profiteering by the major refiner/marketers, have
been largely due to the upward movements in world crude oil prices.
Australian upstream crude oil producers together with world crude
oil producers have been the main beneficiaries of the upward
movement in oil prices. The Australian crude oil market was fully
deregulated in 1988 and Australian crude prices now reflect world
market prices.

As the crude oil price only comprises some 25
per cent or so of the retail petrol price at the pump, the movement
in crude oil price is much more marked than the movement in the
retail petrol price. For example, from March 1999 to September
1999, the quarterly average crude oil price increased 98 per cent
from $US10.93/bbl to $US21.63/bbl compared to petrol prices which
have increased by 13 per cent from 67.1 c/litre to 76.1
c/litre.

Petroleum retailing is changing rapidly with the
appearance of retail convenience stores and large fully serviced
fresh food supermarkets as adjuncts to many petrol station outlets
leading to substantial income generated from non-fuel sales. The
trend seems to be combining supermarkets with petrol retailing.

The aim of this paper is to outline some current
issues pertaining to the Australian petroleum refining and
marketing industries and to provide commentary and insight into
future developments.

The paper outlines Australia's refinery industry
structure and the role of petroleum product imports and provides
some analysis of fuel prices and their relationship with world
crude oil prices. Other topics include fuel price components and
taxation, petroleum product retailing arrangements and retailing
trends, the extent of new investment in refineries, developments in
emission standards for vehicular transport and the deregulatory
process to date.

One of the foremost issues is whether the
current refiners will undertake the substantial capital expenditure
required to upgrade refinery infrastructure capable of producing
clean, low-sulphur fuels. Such fuels are necessary to accommodate
increasingly stringent exhaust emission standards in vehicular
transport. These decisions must be made against a backdrop of
increasing competition from independents in the retailing sector
and persistent low margins and poor profitability in the domestic
petroleum refining sector and the ability to meet requirements by
imports.

Whilst present refiners/marketers have supplied
Australia with, in the main, a secure and reliable domestic supply,
many changes are sweeping the industry. These changes are predicted
to significantly alter present arrangements in the foreseeable
future.

Australia's downstream oil industry has been
built on a platform of refineries, producing fuel in Australia to
supply a nationwide network of fuel distribution and retailing.
This system has to date ensured security of supply of fuel and
other petroleum products to all sectors of the economy and the
community.(1) Local refineries make a major economic contribution
to the Australian economy. For example, they directly employ some
3000 people, account for between $800 and $1000 million of annual
expenditure and between $200 and $400 million of yearly capital
investment. In addition local refineries provide a reliable supply
of local petroleum products which otherwise would need to be
imported and as such contribute positively to the country's foreign
trade balance.(2)

Petroleum refineries are a complex array of
petrochemical units that separate crude oil feedstock by various
means (distillation, catalytic cracking, alkylation and
polymerisation) into a range of petroleum products including petrol
and diesel. The units are connected with an extensive array of
piping (there are over 7.5 kilometres of pipes at the Kurnell
refinery in Sydney); overall management of the refinery is run from
centralised control centres that are now invariably computer
controlled.

Since 1980, the number of refiner/marketers in
Australia has fallen from nine to four and two refineries have
closed. Employment numbers in the industry have almost halved since
the late 1980s and there have been major reductions in the numbers
of distributors and service stations.(3)

Australia currently has eight main refineries
owned by the four majors (Caltex, BP, Mobil and Shell) located in
the capital cities-Sydney, Melbourne, Adelaide, Perth and Brisbane.
These companies also have either crude oil or refined product
terminals at most Australian ports (see Figure 1). The total
capacity of the Australian refineries is around 860 000 barrels of
oil per day. The capacities of the individual refineries are also
detailed in Table 1.

Australia's refineries are quite dated and
small, especially in comparison to new capacity being brought on
line in Asia. Australia's oldest refinery, at Clyde in NSW, was
built in 1928. Most of the others were built in the 1950s and
1960s, the two newest being Lytton and Bulwer Island in Qld, being
built in 1965. Major capital investment programs undertaken at most
refineries in the early 1990s were largely related to the
production of unleaded petrol (total investment exceeding some $2.0
billion). The most recent major investment undertaken was that at
the Bulwer Island refinery which belongs to BP/Amoco. Some $450
million was committed to the refinery upgrade termed the Clean
Fuels Project where novel use of technology was utilised to cut
sulphur content and produce high quality fuels from lower cost
crude oil and residues. BP's stated aim is to position itself to
produce fuels to cater for markets where fuel emission standards
are increasingly being tightened as well as produce a different mix
of retail products to satisfy the company's projected demand
scenario for growing markets such as that for jet fuel. An
essential part of the upgrade was the installation of a
hydrocracker (a unit that converts heavy oil feedstocks into high
quality products), an Australian first, at a cost of around $200
million. BP has also invested heavily at its Kwinana refinery near
Perth spending $200 million in 1999 to move to low benzene, lead
replacement petrol. But it will still need another $100 million to
implement changes to meet ultra low sulphur diesel standards.
(4)

Australian refineries are presently largely
configured to refine light crude, such as that produced from Bass
Strait. Heavy imported crude from areas such as the Middle East is
required in part to produce the heavier range of petroleum products
such as lubrication oils. These products are refined in what are
termed lube units. To produce the product mix required by the
Australian market from light crudes, Australian refineries have
needed to be relatively complex and refining involves a high degree
of secondary processing. To accommodate changes aimed at improving
the ability to process heavy Middle Eastern crude as the
availability of light Australian crude declines and to produce
cleaner lower sulphur fuels, such as has occurred at Bulwer Island,
major capital investment programs will need to be undertaken.

Imports presently account for around five per
cent of the petroleum refined product market. However, the major
independent chains and supermarkets account for around 25 per cent
of retail sales. The independents are able to source supply from
either imports or domestic refineries. Because of an oversupply of
petroleum product in the Asia Pacific region, the independents are
able to negotiate competitive terms with domestic suppliers for
fuel supplies. The oversupply is the result of the downturn in the
Asian economies and either capacity expansions or new refineries
being brought on stream. For example, Caltex has greatly expanded
capacity at its Yoecheon refinery (600 000 b/d) in Korea and a new
refinery is due to come on stream in the near future in Taiwan,
with a capacity of more than half of Australia's total capacity.(5)
By and large, most refineries in the Asian region are much larger
than the ones in Australia and have better economies of scale.
Additionally, many also have coexisting petrochemical plants that
boost economic viability.

Much capacity in Asia and the Pacific has been
targeted to produce diesel to satisfy Asian markets where diesel
vehicles dominate the transport sector. As such, petrol output is
almost a by-product and available for export to countries in the
region such as Australia.

Independent import terminals are located in NSW,
Victoria, Queensland, and Western Australia in addition to
terminals operated by the oil majors at all of the major Australian
ports. The independent terminals are used to unload imported
product prior to distribution and sale.

Recent price increases for petroleum products
(petrol, diesel and LPG), all popularly attributed to profiteering
by the major refiner/marketers,(6) have largely been due to the
upward movement in world crude prices. Crude oil is the basic
feedstock for the manufacture of refined petroleum product
(including petrol and diesel) and its price has a major bearing on
petrol pump prices. The Australian crude oil market was fully
deregulated in 1988 and Australian crude prices now reflect world
market prices. It is the crude oil producers who have been the
major beneficiary of recent price increases.

Both crude oil and petrol prices have increased
substantially in the last six months. These changes are illustrated
in Figure 2 which shows movements in the quarterly average world
crude oil price and retail petrol prices in Australia since early
1995. World market prices of crude oil have increased dramatically
over the last six months as a result of the Organisation of
Petroleum and Exporting Countries (OPEC) and a number of other
major world producers reducing production of crude oil after an
extended period of low prices. Since March 1999, the spot price of
crude oil has increased from around US$10 a barrel (bbl) to around
US$23 a barrel.

Source: Australian Institute of Petroleum (AIP)
and ABARE. Note: The crude oil prices shown are the world trade
weighted average price compiled by the US Department of Energy. The
petrol prices are the Australian capital city averages (Sydney,
Melbourne, Brisbane, Adelaide, Perth, Hobart, Darwin and Canberra)
for unleaded petrol.

It is evident from the graph that there is only
a broad correlation between the world crude oil price and the
retail petrol price. This can be explained by the fact that there
are a number of components that make up the final retail pump
price. The crude feedstock price accounts only for between 15 and
25 per cent of the retail pump price (see Retail petrol price
components). Both crude oil and petrol prices trended upwards from
March 1995 to December 1996, although there was considerably more
volatility in the average retail petrol price. Furthermore, both
prices trended downwards from March 1997 to March 1999. However,
the decline in the average retail petrol price from 75 c/litre to
67.1 c/litre was only of the order of eleven per cent whereas the
decline in world crude oil prices from US$20.69/(barrel) bbl to
US$10.93/bbl was of the order of 47 per cent. In a similar vein,
both crude oil prices and petrol prices have trended upwards from
March 1999 to September 1999 and again the percentage changes are
heavily skewed towards a substantial change in the crude oil price
compared with a smaller percentage change in retail petrol prices.
In this period, crude oil prices have increased 98 per cent from
$US10.93/bbl to $US21.63/bbl compared to petrol prices which have
increased by 13 per cent from 67.1 c/litre to 76.1 c/litre.

The main producers of Australian crude are the
BHP/Esso joint venture in Bass Strait, the Woodside consortium on
the North West Shelf in Western Australia and the Santos consortium
in the Cooper/Eromanga Basin in northeast South Australia. These
companies have been the main beneficiaries in Australia of higher
world crude oil prices. Some benefit will flow to government in the
form of taxes. Australia is around 80 per cent self-sufficient in
crude oil, although this is expected to increase to a high of 99
per cent in 1999 because of a return to full production in Bass
Strait and increased output from the North West Shelf. This high
level of self-sufficiency, however, is expected to gradually drop
away to around 62 per cent by 2007.(7)

The major components of the retail petrol price
are federal government petroleum product excise, crude oil
feedstock prices, and refining, distribution and marketing profit
margins. Crude oil feedstock is priced on the world market. Its
price in Australia is also affected by the Australian/US dollar
exchange rate as world prices are denominated in US dollars.
Depreciation of the Australian dollar against the US dollar will
increase local prices. A report published in 1997 established the
breakdown of the indicative retail prices as outlined in Figure
3.(8) This study found the combined return to the refiner,
distributor and retailer to be only 15 per cent of the retail pump
price.

Taxation comprises some 60 per cent of the
retail pump price. It is the only component that is totally
transparent, although not readily displayed at retail petrol
outlets. The government petroleum product excise tax is currently
43.485 cents per litre for both unleaded petrol and diesel. This
tax is increased in February and August each year in line with the
Consumer Price Index (CPI). Product excise includes a charge of 8.2
cents a litre collected on behalf of the States in place of the
State franchise tax that was previously collected. Some States,
notably Queensland, rebate the whole of this tax whereas other
States rebate only smaller amounts and others rebate nothing,
notably NSW (except for the far northern region), Western Australia
and the ACT.

The trends in the taxes raised over the period
from 1980-81 to 1999-00 are outlined in Figure 4. It is clear that
revenue from petroleum product excises has risen dramatically over
this period and is now one of the major components of the
Commonwealth Budget. In marked contrast, revenue from crude oil and
LPG excises (largely replaced by the Petroleum Resource Rent Tax
(PRRT-an excess profits related tax) has declined significantly. It
is easy to see that taxes have switched from the wellheads in the
oilfields to the petrol pump or point of sale. The rationale for
the switch has largely revolved around successive Australian
governments' expressed intentions of encouraging the exploration
for and development of Australia's oil and gas resources.
Governments have relied heavily on the relative unresponsiveness of
petrol and diesel demand to changes in prices to continue to raise
taxes at the petrol pump.

Profitability of the Australian
refiner/marketers has been poor in recent times, and according to
many commentators, well below the risk-free rate of return on
10-year bonds. Australia's oil refiners/marketers have publicly
stated that such low levels of earnings are unsustainable so major
changes will need to occur.

There is a misconception that because the same
companies undertake crude oil production and refining, Australia's
refining and retailing industries must be reaping the benefits
because of the recent surge in world crude oil price. However,
there is only a very low degree of vertical integration in
Australia from exploration and development of crude oil through to
petroleum refining (see Australia's main crude oil producers in the
section Fuel Prices on page 6). Whilst Australia's oil
refiner/marketers are largely owned by world majors (Caltex, BP,
Shell and Mobil), there has been a worldwide separation of business
into both upstream and downstream entities due to the increasing
forces of globalisation and each entity must operate profitably
within its own market environment. Caltex Australia Ltd, unlike the
other three refiner/marketers, which are foreign owned, is 50 per
cent owned by Australian public shareholders. The BHP/Esso joint
venture, the Woodside consortium and the Santos consortium (see
page 6) dominate the upstream sector in Australia. Shell and BP are
part of the Woodside consortium although these holdings are
separate from their refining and marketing interests in Australia.
Refiners buy crude oil at prevailing world prices even though it is
dominantly produced in Australia.

Apart from Bulwer Island, Australia's refinery
industry would require major investment to cater for the production
of higher quality and cleaner fuels. This is especially so for
diesel where sulphur content standards are anticipated (see below)
to reduce from the present standard of 5000 parts per million (ppm)
to 50 ppm by 2006 (although most refineries are now producing
diesel to around 1300 ppm sulphur). For diesel, this is a 100-fold
reduction in the sulphur standard and also well under the present
500 ppm US and European standards.

The move will bring Australia's diesel fuel
specifications into line with standards to apply in Europe from
2005. Changes in petrol standards are also being introduced to
coincide with the adoption of Euro3 petrol vehicle emissions
standards in 2005-06. This will necessitate further reduction in
sulphur levels in petrol and the production of higher-octane fuel.
The introduction of tighter fuel standards anticipates in part the
outcome of the Downstream Petroleum Products Action Agenda,
commissioned by the Federal Government, which is expected to report
towards the end of 1999. As an aside to the above developments,
most refineries are expected to curtail and terminate the
production of leaded fuel in the near future. BP has announced that
it will be introducing Lead Replacement Petrol (LRP) at its Kwinana
refinery in Perth from September 1999 and from its Bulwer Island
refinery in 2000.

As an incentive to switch demand to cleaner
fuels and speed the introduction of new refinery investment,
differential excise treatment of ultra low sulphur diesel (50 ppm)
and other diesel will be introduced from 1 January 2003 at one cent
difference per litre, increasing to two cents a litre from 1
January 2004. Additionally, only ultra low sulphur diesel will be
eligible under the Diesel and Alternative Fuel Grants Scheme
Act 1999 from 2006 for on road vehicles.

Production of new fuels would require the
Australian refineries to undertake substantial new investment. It
is estimated that if all eight refineries are to produce fuel at
the new standard, it is likely that new investment of $1 billion
would be required.(9) A difficulty in any decisions relating to
refinery closures is that plant-decommissioning costs can be of the
order of $400 million.

Other problems according to the
refiner/marketers is that considerable associated investment is
tied up with both their company controlled sites and their retail
franchisee outlets (see Petroleum Retailing). The Federal
Government announcement (see section The Deregulation Process on
page 12) that it will not proceed with the repeal of the Franchise
Act and Sites Act means the majors will not be able to proceed with
the rationalisation of their retailing sites. This, according to
the majors, will hamper their competitiveness with the independent
retailers.

Several merger proposals have not proceeded past
formal discussion with the Australian Competition and Consumer
Commission (ACCC).(10) Many industry commentators maintain there
are considerable economies of scale and huge benefits to be had
from the linking of facilities and the pooling of skills. In August
1998, Mobil and Shell announced they had signed a memorandum of
understanding on a proposal to combine their refining operations
into a new joint venture to be owned equally by the two companies.
The proposed venture, however did not proceed when Mobil informed
Shell Australia in January 1999 that it was withdrawing from
negotiations. Whilst the ACCC had not made a determination on the
proposal, it was mooted that a much larger proposed worldwide
merger between the oil giants Exxon and Mobil may have had a
bearing on the decision. Mobil's withdrawal from the talks with
Shell came at a time of its planned merger with Exxon. Esso
Australia (a former subsidiary of Exxon) pulled out of marketing
and retailing in Australia several years ago.

Another similar planned joint venture between
Caltex and BP surfaced in December 1998. A statement announcing the
talks said both companies believed efficiencies were necessary in
their Australian refining businesses to fend off 'intense regional
and domestic competition in refined petroleum products'. Despite no
obvious progress on the merger proposal, Caltex and BP and have
proceeded to merge their oil lubricant businesses.(11) The venture
will combine the blending, packaging and warehousing of lubricants
into an equally owned new entity, Australasian Lubricants
Manufacturing Company. Caltex's Lytton refinery is just across the
river from the Bulwer Island (BP's refinery in Brisbane) which
enables such things as terminal sharing and rationalisation of
transportation. Under the proposal, BP and Caltex will reduce the
total number of blending plants from four to three. BP is to close
its Spotswood blending plant in Melbourne and will take supplies
from Caltex's nearby Newport operation. Caltex will retain its
Brisbane plant and BP its Perth plant.

A number of well-defined groupings or entities
undertake the retailing of petroleum products in Australia. The
nature of retailing is presently highly regulated by the Franchise
Act and Sites Act. However, the activities of the
independents do not come under the gambit of these Acts and as a
result, it is no understatement to say that the nature of petroleum
product retailing in Australia is changing rapidly.

Although individual retail petroleum product
figures are not publicly available, sales of petrol and diesel in
1998-99 were 18 229.7 and 12 818.4 ML respectively.

This category accounts for some 35 per cent of
the market sites although the company owned and operated sites only
occupy some five per cent of the market as specified in the
Sites Act. With company operated outlets, in most cases
the operator is paid a fixed commission on product sales, or in
some cases the operator is a company employee. For products other
than petroleum products, the operator conducts business in a
similar manner to other dealers.

With franchisee operated refiner/marketer owned
retail sites, the refiner/marketer buys or leases the site,
installs the buildings, tanks and dispensing equipment. A
franchisee leases the outlet from the refiner and operates to
franchise standards. The franchisee buys fuel products from the
refiner/marketer and sets the price.

This category has by far the largest number of
outlets; they have various owners and retail either branded or
unbranded petroleum products. These distributor-supplied sites are
either independent or linked to a refiner/marketer. These sites may
be owned by the distributor or independent chains or be
dealer-owned. They may carry the brand name of the distributor,
their own brand, the brand of the refiner/marketer company or no
brand.

In this case, the owner/operator enters an
agreement with a refiner/marketer or distributor to carry the
symbols of that brand and sell its products exclusively. Some
owners operate a number of sites where individual outlets may be
contracted to more than one refiner/marketer.

These include networks operated by companies
that display their own brand. Others comprise cooperative buying
groups in which a number of independent owners make joint product
purchases and display a common brand throughout the chain. The
common independents include Liberty, Burmah, Gull, Southern Cross,
Matilda and United.

The entry of the
supermarkets into petroleum retailing is now well established. The
dominant player is Woolworths, closely followed by Safeways which
is a wholly owned subsidiary. Woolworths currently operates around
85 outlets and plan to have around 200 outlets by the end of 2000.
In addition to offering competitively priced fuel, Woolworths
outlets offer a further discount per litre with minimum purchase
vouchers obtained from their supermarket grocery stores. The
Franchise and Sites Acts do not cover supermarkets and other large
independent retailers. They have therefore been able to manage
their businesses as they see most appropriate, in marked contrast
to the refiner/marketers.

Industry analysts generally agree that there are
too many service stations to supply the Australian retail fuel
market. Service station numbers have been falling for some
time-from around 20 000 in 1970 to the current count of around
8 300. This number will continue to fall according to industry
analysts to 6 000 or even 5 000. The decline is likely to
affect all sectors of the service station industry, including the
networks of the majors.

The two most striking developments that have
occurred in the retailing sector have been the increasing market
share of the independent retailers and the trend to develop
convenience stores in close association with retail outlets. These
convenience stores now substitute for the disappearing 'corner
store'. The oil majors are expanding on what they initially
developed as supplying car washes, fast foods and convenience items
to more ambitious moves into the supermarket business. For example,
Caltex has taken a step up from its Starmart convenience stores
attached to the forecourts of its service stations to full size
supermarkets, with grocery chain IGA featuring a wide range of
fresh foods. The trend seems to be towards combining supermarkets
with petrol retailing.

Whilst some service stations in metropolitan
areas have a strategy heavily dependent on maximising petrol sales
volume at very low retail margins, most service stations in
metropolitan and country areas have needed to increase their
non-fuel revenue substantially to remain viable. The main growth
areas for non-fuel revenue are convenience retailing, with stores
ranging from relatively small shops to large fresh food
supermarkets.

As with many other industries, the petroleum
refining and retailing markets have been significantly
restructured. However, Peter Duncan, Executive Director of Shell
Australia claims Australia remains one of the most regulated
petroleum markets of all developed countries. He maintains that
'the heavy-handed regulatory framework covering prices, site
ownership and franchise relationship contrasts sharply with the
near absence of these types of intervention in France, Germany, UK,
US and New Zealand'.(12)

Restructuring to date has resulted in the
abandonment of the setting of a maximum endorsed wholesale price
for petrol and diesel by the ACCC. It has also been associated with
the open access to bulk terminals owned by the refiners allowing
bulk purchase of refined product by interested parties on
commercial terms. The four majors- Caltex, BP, Mobil and Shell-have
made a commitment to provide open access to their product terminals
around the country. This means that so long as safety requirements
are met, independent operators are free to approach any terminal to
buy their petrol and diesel supplies direct at wholesale prices on
a negotiated contractual basis. As in the course of any business,
the proviso will need to meet volume criteria and be a commercially
viable proposition to both parties. The exception to this open
access arrangement will be franchisees that, as part of their
franchise agreements with the oil companies, have exclusive supply
contracts. Such contracts are legally binding.

Apart from the above developments, the
deregulatory process has now stalled. A measure designed to promote
greater competition within the industry was the Federal
Government's intention to repeal the Franchise Act and Sites
Act of 1980 and the delivery of a mandatory Oil Code.
However, the Government announced in September 1999 that it would
not proceed with this legislation as it was maintained that
agreement could not be reached between all stakeholders.(13)

The oil majors were pushing strongly with
continuing reform as they maintain that the 1980 Acts disallow them
to compete with the new independent marketers on an equal footing.
The recent increase in the availability of fuel sources outside
Australia (particularly in Asia) has made it relatively easy for
independents to bring in their supplies direct from foreign
refiners through independently owned and operated terminal
facilities located in several Australian States.(14)

The Motor Traders Association of Australia
(MTAA), which represents service station franchisees, argued that
the repeal of the 1980 Acts could hand more power to the big oil
companies.(15) The Association maintains that despite the
deregulatory process to date, there is still inadequate competition
for fuel at the wholesale level. Although a number of organisations
including the Australian Institute of Petroleum (AIP), MTAA and
Australian Service Station Association (ASSA) were reportedly close
to agreement in April 1999, there were still outstanding unresolved
issues according to the independent marketers and the MTAA about
the proposed tenure provisions. Agreement between all parties on
all issues was an essential proviso that the Government required
before it would proceed with the repeal of the Franchise Act and
Sites Act and the establishment of the Oilcode for the final
implementation of the Reform Package.

Whilst the petroleum and marketing industries
have provided Australia with, in the main, secure and reliable fuel
supplies, it is almost certain that significant changes are likely
to occur in the foreseeable future to the petroleum refining and
marketing industries because of a number of emerging factors. These
factors include the fierce competition from independent retailers
who now account for 25 per cent of the retail market. Other issues
are claimed present low levels of profitability of Australia's
refining industries, deemed as unsustainable, and regulatory
hurdles to further rationalisation and merging of current refining
and marketing operations between the four majors-Caltex, BP, Mobil
and Shell.

Recent petrol price rises for petroleum products
(petrol, diesel and LPG), popularly attributed to profiteering by
the major refiner/marketers, have been largely due to the upward
movement in the world price of crude oil. Significant concerns
remain, however, regarding the petrol price differential between
urban and regional Australia as the price differential lacks
transparency. The major beneficiaries of increased world crude oil
prices are crude oil producers (both Australian and global), not
the Australian refining/marketing entities. Because of the forces
of globalisation, there has been a disaggregation of oil businesses
into regionalised upstream and downstream entities and these
entities must operate profitably in their own market
environment.

There is little vertical integration between the
upstream and downstream sectors of the petroleum business in
Australia. The main Australian crude oil producers are BHP/Esso,
and the Woodside and Santos consortiums. Whilst Australia is about
80 per cent self sufficiently in crude oil, this is expected to
fall to around 62 per cent by 2007.

It appears that the deregulatory process has
stalled with the Government's announcement that it will not proceed
with its earlier expressed intention to repeal the Franchise Act
and Sites Act and the delivery of a mandatory Oilcode. The
oil majors have indicated that present levels of profitability are
unsustainably low and they are faced with further large capital
investments to cater for new clean low-sulphur fuels. Despite
apparent regulatory hurdles to further rationalisation and merging
between the oil majors under present arrangements, the Government
will release its much-awaited Downstream Petroleum Products Agenda
towards the end of 1999. This may provide indicators as to future
action and strategies. The economic effects are not clear, with on
the one hand employment likely to fall in the refining industry if
refineries were closed, countered to come degree with a likely to
rise in employment in the importing industry. Most industry
analysts predict substantial changes to the present industry
structure and whether that will be a series of mergers, closures or
further expansions of independent retailer activity remains to be
seen.